Analyst: California's deficit drops to $1.9B

SACRAMENTO -- California's nonpartisan budget analyst says the state now faces a much smaller deficit of $1.9 billion through the end of the next fiscal year and could even see surpluses after that.

The Legislative Analyst's Office released a positive but cautious forecast Wednesday in the state's first budget assessment since Californians last week approved Gov. Jerry Brown's sales and income tax initiative, Proposition 30.

"The state's economic recovery, prior budget cuts, and the additional, temporary taxes provided by Proposition 30 have combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges," wrote analyst Mac Taylor.

Taylor projected a much smaller deficit of $1.9 billion through the end of the 2013 fiscal year in July 2013, compared with the $15.7 billion deficit lawmakers faced earlier this year.

He said state expenditures will be $2.7 billion greater than forecast in the 2012-13 budget, partly because of overly optimistic projections for how much the state would get from the dissolution of local redevelopment agencies that Brown initiated. Taylor said the state will see about $1.8 billion less than expected.

On Wednesday, the governor said the analyst's report validated his administration's work these past two years to reduce spending, streamline departments and make government more efficient.

"We've had cuts. We've had a lot of cuts. And with Proposition 30 we have some revenue. ... Together it puts the state in a very solid position for a sustainable balanced budget for years to come," Brown told reporters at appearance at a University of California Board of Regents meeting.

The governor said he would like to see the state exercise fiscal discipline, pay down our debts and build a rainy day fund. "We're not out of the woods yet," he said.

Republican Assemblyman Jim Nielsen of Gerber said he believes Democrats will repeal a state law eliminating automatic cost-of-living increases and go on a spending spree.

"Being encouraged by this low deficit level and emboldened by the people approving tax increases, I think that the spenders are going to say, 'Hey, we've got the green light,' " said the vice chair of the Assembly budget committee. "So the key will be what restraint Jerry Brown can exert upon them."

The analyst's report projects a surplus starting in 2014, thanks partly to Brown's tax initiative, the state's economic recovery and previous budget cuts, but he cautioned that the forecast is dependent upon a continuing steady economic recovery and strict spending controls by the governor and Legislature.

Brown, a Democrat, bet big this November by asking voters to approve Proposition 30, which raises the statewide sales tax by a quarter cent and boosts income taxes on the wealthy to help solve the state's ongoing deficit. Voters, particularly minorities and those between the ages of 18 and 29, agreed.

The tax hikes are expected to provide an additional $6 billion a year for the state and deliver on a campaign promise Brown made two years ago to fix the state's perpetual budget deficits and to raise taxes only if voters approved.

Proposition 30 raises the statewide sales tax to 7.5 percent for four years and income taxes rates to between 10.3 and 12.3 percent for seven years on income over $250,000 a year. The credit rating agencies Standard & Poor's and Moody's signaled their approval of the state's financial picture after it passed.

Voters also approved more taxes under Proposition 39, which closes a corporate tax loophole and is projected to raise about $1 billion a year.

The $91.3 billion budget lawmakers approved last summer called for about $6 billion in automatic cuts to K-12 schools and universities if the initiative failed.

According to the state finance department, tax revenues have largely been on pace with the state's budget projections. Overall, revenues are $176 million below forecast, but October revenues came in $208 million above the month's forecast.

The finance department reported that the state brought in an additional $1.4 billion from income and corporate taxes that it had attributed to past years. But Taylor warned that such practice could be problematic and he urged the Legislature to direct the administration to use a simpler accounting method.

But the decline of Facebook's stock price has rubbed out some of the money the state was hoping to receive. The analyst previously estimated the state would generate $1.9 billion from taxes related to the sale of Facebook's stock but reduced that amount by $626 million.

Facebook went public at $38 a share but closed around $22 Wednesday.

The analyst's office cautioned that its budget outlook was based on conservative assumptions. Taylor said his staff did not account for cost-of-living increases or inflation in state programs. The state has yet to address its pension and retiree health care liability. And California's economy could suffer as a result of the federal "fiscal cliff," which could plunge the nation back into recession.

Taylor noted that while Proposition 30 will bring more money to public education, other components of state spending, such as health care and social services, remain constrained.

"I think it's a little bit of a tale of two budgets there," Taylor said.